Why I'm saving up $15,000 this year

By MP Dunleavey

Editor's note: Join columnist MP Dunleavey and a group of women as they seek to strip away the myths around money, liberate themselves from debt and find financial sanity. Follow the continuing quest of the Women in Red every other Wednesday in Dunleavey's column on MSN Money.

I admit it. Until this economic crisis struck, I did not take my emergency fund seriously enough.

Oh, I thought I did.

I had set up automatic weekly transfers to a separate, sacred ING savings account. And my husband and I didn't touch that money unless there was a true emergency (like my appendectomy in 2007).

Yet in the two and a half years since we set up our designated emergency fund (or EF, as these cash cushions are known here at Women in Red headquarters), we never managed to save more than one month's worth of expenses.

• Join the Women in Red Savers

That kind of wimpiness won't work in a climate like this. The great lesson of this lousy economy is that you need the strongest, deepest, widest safety net possible.

Can my family and I save at least $15,000 -- roughly three months of basic living expenses -- in 2009? That's my goal for this year.

$1,250 a month? Yikes

The first step with any personal-finance target is to sit down and run the numbers.

There was one crisis recently -- a superbig tax bill -- that cut into our cushion. Now we have about $3,000 saved, which in theory would leave $12,000.

But the truth is that we need that $3,000 to meet our health insurance deductible, in the event of a hospitalization. (Ideally, we would also save the amounts of our home insurance and car insurance deductibles. We'll work up to that.)

To cover three months of expenses, we're still looking at $15,000. Divide that by 12 and . . . we would have to save $1,250 a month to reach our emergency-fund goal in 2009.

Yikes.

That would be in addition to our retirement ($600 a month) and our regular savings ($200 a month), which is for the car, house and any surprise expenses that crop up.

Of course, since we finished paying off $30,000 of debt in November, we've had an additional $500 a month that we can put toward our new cause.

Plus, we have been saving $300 a month for emergencies anyway, so that's a total of $800 we can save. In an ideal world, we are only $450 short per month.

Sob!

The trouble, as we all know, is that we're not living in an ideal world. It's full of financial setbacks, curveballs and other fun surprises. On top of which: You're trying to save several months of living expenses, while living on the income that pays those living expenses now.

Is it any wonder that so many people find it hard to save?

• Talk about it: How's your emergency fund?

Too close to the edge

Many middle-class Americans are indeed strapped -- living so close to the edge of their incomes that creating any cushion can seem almost impossible, according to a recent study by Demos, a nonpartisan economic research group in New York.

Nearly a third of families surveyed had less than $100 per week left after meeting basic expenses. About 75% could not survive for three months if they had to rely on savings or assets alone.

So what do people do in the event of an emergency? Turning to credit cards or tapping home equity is getting harder to do. To get cash, more people are willing to hit their long-term savings, according to a November survey by Hewitt and Associates, a human-resources services company, which examined about 2.7 million 401(k) accounts.

More than 6% of employees withdrew money from their accounts in 2008, up from 5.4% in 2007. Hardship withdrawals increased 16%, from 34,234 to 39,745. It's not staggering, but it's a sign of the times.

P.S. A hardship withdrawal is just about the worst financial move you can make. The money is hit with a 10% penalty, plus you have to pay taxes on it. And, unlike a 401(k) loan -- which doesn't incur the penalty unless you default -- you're barred from contributing for six months after you take the withdrawal, and you never pay yourself back. It's a total loss, in other words.

Even if President Barack Obama's proposed plan -- to make hardship withdrawals easier by eliminating the penalty -- is carried out, this is not a solution to the long-term-savings crisis in America.

Continued: Feeling vulnerable

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